Take Two: Senate Democrats Scale Back Payroll Tax Relief Bill

Senate Democrats, hoping to put more pressure on Republicans to support a payroll tax cut, Monday will unveil a new, scaled back bill that drops President Barack Obama‘s plan to cut employers’ share and reduces proposed new tax on millionaires, a senior Democratic aide said.

Associated Press

The U.S. Capitol building (AP Photo/Pablo Martinez Monsivais)

By dropping the proposal to cut employers’ share, Democrats would reduce the cost of the bill from $265 billion over 10 years to about $180 billion over 10 years, the aide said, but the entire cost would still be offset by spending cuts and tax hikes.

Leaders of both parties are looking for a way to act on the payroll tax before the end of this year when, unless Congress acts, the employee payroll tax that funds Social Security will increase by two percentage points, to 6.2%. However, the Senate last week rejected both Democrats and Republicans’ versions, and House Republicans are divided over the issue.

Under the new Democratic proposal, the surcharge in income over $1 million would be less than 2% — down from 3.25% in the version of the bill introduced by Democrats last week. It would expire after ten years, instead of the original proposal to make it a permanent change in tax law.

“We’re trying to make it more appealing to Republicans who want to be on the right side of the issue,’’ said the senior Democratic aide.

However, any version of the millionaires tax is likely to meet stiff resistance from Republicans. Michael Steel, a Boehner spokesman said he did not expect the new proposal to be a `credible compromise’ because the millionaire’s fee was a “job-killing tax hike.’’

Because the new plan will raise less revenues from the millionaires tax, Senate Democrats are expected to include other spending cuts to offset the bill’s cost. Democratic aides said the new offsets would be drawn from the work of the deficit cutting “super committee,’’ said the aide. The panel failed to meet its goal of writing a bill to cut $1.2 trillion from the deficit over ten years, but its members reached tentative agreement on a menu of deficit-reduction proposals.

Despite criticism from rank-and-file conservatives, House Republican leaders are trying to craft a broader, $200 billion plan that also extends extended federal unemployment benefits for the long-term unemployed, which also expire Dec. 31. The GOP bill also will also renew a law that has blocked a scheduled cut in Medicare fees to doctors.

For the pay roll tax holiday, the GOP bill would simply extend the current 4.2% rate; Democrats are proposing to cut it further to 3.1%. Democrats also hope to extend unemployment benefits and doctors’ payments, but have not yet linked those provisions to the payroll tax break.

The biggest difference between the parties, however, is in how they proposed to offset the cost of those extensions. Republicans want to save money by extending a current federal employee pay freeze, and possibly requiring upper income people to pay more for Medicare coverage. They are adamantly opposed to the tax on millionaires because they believe it will hurt small businesses.

“This proposal moves in the right direction,’’ an aide to House GOP leaders said of the new Democratic proposal, ‘ but the inclusion of the small business tax hike is a ‘poison pill’ that shows Senate Democrats are aiming to fail – so President Obama can attack Republicans.”

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